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Your Startup’s Proposed Partnership with a Large Corporate: Doomed to Fail?

I’m a big fan of startups partnering with incumbent corporates.

As I’ve written previously, such partnerships, where successful, can provide a variety of benefits to the startup: (a) credibility in dealing with other customers; (b) access to the corporate’s distribution network (assuming the corporate’s salesforce is appropriately incentivized); (c) the opportunity to test the startup’s technology in a complex environment and, potentially, develop innovations that the startup can use with other customers; and/or (d) in appropriate circumstances, minority investment that may further contribute to credibility as well as funding.

But one needs to recognize the warning signs that a potential partnership is likely to go nowhere. I see too many startups focused on potential partnerships that will never happen or, if they do eventually happen, will not achieve the startup’s desired outcomes.

Here are some thoughts on red flags that you should look out for.

1. Your potential partner has a poor track record, or no track record, of partnerships with emerging companies

Some incumbents are more hazardous choices for partnerships than others.

Very large public corporations, especially large financial institutions, may as a group generally be more difficult as potential partners, because there may be more people who have the power to say “no.” In any case, the contracting cycle is likely to be longer in large corporations than in medium-sized or smaller corporations, so spending all of your time pursuing large opportunities is a risky strategy.

Conversely, of course, some large corporations, especially tech companies, have substantial experience in implementing successful partnerships.

You should not have much difficulty in researching the partnership track records of large corporations — there is much information in the public record. If they haven’t successfully entered into many partnerships with emerging companies before, if they have done many proof-of-concept trials that have not turned into contracts, or if their partnerships have not gone well, query if you have a credible reason to believe that the story will be different with your startup or scale-up?

Also, what is the incumbent’s track record in internal innovation? If they seem capable of only making process improvements, if that, what is the likelihood that they will succeed in doing something more disruptive with an external party?

Finally, beware of unpaid proof-of-concept trials with large corporations. The amount that an emerging company typically would ask for a trial is less than the paperclip budget of most large corporations. If they are not willing to show that level of commitment, you should be under no illusions as to your chances of ultimate success.

2. You seek to partner with a dominant incumbent on a core function

Large incumbents with strong market positions are unlikely to partner with an emerging company for a function that is central to the incumbent’s business. This reticence reflects: (a) the high risk for the incumbent (and the careers of its executives!) in relying on an emerging company for may risk the success it already enjoys; and (b) the fact there may be interested parties in the incumbent for whom the innovation is a threat (you shouldn’t expect the turkeys to vote for Christmas …).

Challengers and small and medium-sized businesses seeking to secure a competitive advantage in the market are more likely to be successful partners of emerging companies for mission-critical innovations. They have less to lose, and more to gain.

Alternatively, for the emerging company, initially pursuing a partnership opportunity with a large incumbent in an area that is not mission-critical may make more sense. Success with that project may increase the likelihood of the incumbent permitting you to take on something more central to its business.

3. Your deal’s supporters at the potential partner lack relevant decision-making authority and senior support

If you are exploring a partnership with a counterparty, especially a large counterparty, make sure to obtain clarity as to the decision-making process on their side. For example, your position will be very different if the CEO has determined to pursue an initiative than if your sole advocates are in an innovation group. Similarly, a partnership that lacks support from the relevant business unit leadership is unlikely to succeed, even if it has nominal senior approval.

Also, be sure that you understand whether, and why, the counterparty is invested in the innovation. You are at much greater risk if you are providing a “nice to have,” as opposed to something that the business unit believes addresses a real pain point or otherwise will provide real financial or competitive value.

Unfortunately, we have all seen cases where the relevant startup lead at the incumbent counterparty is sincere and committed to the potential partnership, and communicates that enthusiasm, but ultimately is unable to surmount internal barriers.

In particular, many large corporations have established innovation units, but then have not given the heads of those units the necessary support to get things done.

4. Your potential partner has legal, financial or IT diligence requirements or procedures that are grossly disproportionate to your company’s potential deal

There is a fundamental imbalance of resources between an incumbent and an emerging company.

Incumbents have large legal, finance and IT departments. Working with under-resourced startups isn’t their idea of a good time.

Incumbent legal departments are accustomed to dealing with counterparties with one-sided 80 page (or, indeed, much longer) “door stop” procurement agreements and (more than they will admit) negotiating those contracts. They may also expect counterparties to maintain high levels of errors and omissions insurance, provide performance guarantees and agree to other transactional elements that their large counterparties can manage.

Additionally, incumbent legal, finance and IT departments may have detailed diligence processes that are disproportionate to smaller transactions that don’t touch the incumbent’s core activities and systems.

In contrast, an emerging company is likely to have limited if any internal legal resource and limited finance and IT resource, and probably can’t afford much external legal or other help. Additionally, some of the standard “asks” of a large corporate incumbent will impose disproportionate burdens on a small emerging company.

There are a few ways to address this:

First, at the same time as you get clarity on the business terms of a possible partnership with an incumbent, get clarity on how the incumbent expects that this arrangement will be documented and implemented. Raise objections early if the incumbent’s “standard” elements are likely to be significant obstacles.

Conversely, prepare yourself for what the corporate will reasonably expect. For example, if it is standard in your sector for counterparties to expect compliance with certain ISO standards, particularly in critical areas like cybersecurity, don’t assume that these will be waived because you are a startup.

Second, try to use your lead business counterparty to help you engage with their legal, financial and IT departments. For example, on the legal side, you may be asked to mark up the incumbent’s standard form. If at all possible, don’t do it! You will wind up in an expensive, and lengthy, ping-pong match with the legal department, one that may require you to rely on external lawyers that you can ill-afford. If you are able to address critical issues in the agreement on a business level with your business counterparty, you can then ask him or her to arrange with the incumbent’s legal department to modify the agreement accordingly. You’ll need some legal support in this exercise, but with some “issues list” guidance you should be able to negotiate most of the key points yourself.

Finally, if it becomes apparent that the incumbent’s legal, financial and IT processes will become disproportionately burdensome, you need to ask yourself whether this reflects broader issues as to the incumbent’s ability to deal with emerging companies on a size-appropriate basis. You should perhaps consider this as an advance warning — the “canary in the mine.”

5. You over-focus on a very few opportunities, and fail to reassess their progress periodically on an objective basis

I have unfortunately seen too many cases where emerging companies have put all of their eggs in one or a couple of baskets, and risk their future on their ability to achieve successful implementation of one or a couple of partnership opportunities.

It is easy to fall in love with a particular potential transaction that looks very sexy but winds up going nowhere.

Keep track of the resource that you are applying to specific potential transactions. Periodically reassess (with an objective view and a “cold towel”) whether the transaction is proceeding appropriately. Be prepared to reduce your allocation of resource to that opportunity, or even cut it off, if you find yourself wallowing in the mud.

Also, don’t forget — if a trial doesn’t result in a contract, the costs to you are not only the resources diverted from other opportunities. If the trial is public, you will also need to explain, in speaking with other potential customers, why the corporate chose not to buy.

Conclusion

Partnerships between incumbents and emerging companies face many hazards. Successful ones can deliver real value to both parties, but most never happen. Manage your pipeline and resources accordingly.

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This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact robert.mollen@friedfrank.com or via LinkedIn here.

You will find some of Bob’s other weekly blogs for emerging and growth companies here and on Medium: http://bit.ly/StartupGuides